BoA turns bullish on closing its legacy asset division

The second largest bank in the US, The Bank of America (NYSE: BAC), holds strong buy recommendation from a dozen equity research firms, including Raymond James, Jefferies, and Oppenheimer. The bank did beat the earnings estimates of analysts in the second-quarter.

However, it recorded a y-o-y decline in the total revenue and net income. Thus, common sense dictates a sell-off of the stock of Bank of America. On the contrary, the share price is on an uptrend.

A careful study of the company’s financial reports would reveal the below discussed important facts that continue to boost the share price. Bank of America gained $0.09 or $0.58% on Monday to close at $15.58.

The Charlotte, North Carolina-based bank reported Q2 2016 net income of $4.23 billion or $0.36 per share on total revenue of $20.40 billion. During Q2 2015, the banking behemoth recorded net income of $5.13 billion or $0.43 per share on total revenue of $21.96 billion. The earnings topped the analysts’ estimates of $0.33 per share.

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At the outset, considering the 7% decline in revenue and 19% decline in the earnings, it looks as if the bank has not performed well. However, a look at the financial report will reveal that it was because of the $815 million loss posted by the ‘All Other’ segment, the bank’s performance looked unimpressive. The ‘All Other’ segment, which consists of consumer card business and non-core mortgage loans, to name a few, recorded a negative revenue of $702 million because of market related adjustments.

All other segments performed well. The consumer banking segment reported a 1% y-o-y increase in revenue to $7.8 billion. The earnings increased 3% to $1.7 billion. The wealth management business recorded 8% growth in the net income to $722 million on revenue of $4.456 billion. Aided by an increase in the advisory fees, the global banking segment posted 11% growth in revenue to $4.7 billion. The net income was $1.491 billion. The BoA’s trading division recorded blockbuster profit of $1.1 billion, up 42% from the prior year similar period. The revenue rose 10% y-o-y to $4.31 billion.

The BoA’s credit quality remained strong in the second-quarter of 2016. Thus, provision for credit losses declined marginally and $9 million was released from the reserves.

Since the 2008 credit crisis, the bank has successfully absorbed credit losses of about $200 billion. Last year, a court order slashed BoA’s outstanding legal liabilities by $7.4 billion.

During the quarter, the bank also closed its legacy assets and servicing segment, which held the toxic and non-core assets. Between 2011 and 2015, the segment had recorded $44 billion in net losses. The bank currently earns a 0.78% return on its $2.2 trillion assets. A 100 basis point rise in the Fed interest rate would result in $6 billion increase in the net earnings. With a rate hike in the horizon, fundamentally, the bank is expected to better its performance in the upcoming quarters.

The stock broke the level of 15 after failing twice earlier this year. The next resistance for the stock exists at 17. The rising momentum indicator suggests the existence of underlying bullishness in the stock.

Thus, a trader should look into the prospects of purchasing a one touch call option to gain from the probable appreciation in the share price. The binary trader should also look for a strike price of $17 or lower and a contract expiry date in the second week of October.

Chad Simmons

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